Will KitKat Help Google Move Higher?

With shares of Google (NASDAQ:GOOG) trading around $870, is GOOG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Google is a global technology company focused on improving the ways people engage with information. The business is focused on the following areas: search, advertising, operating systems and platforms, and enterprise. The company generates revenue primarily by delivering online advertising. Google is a search giant with most of the market share, largely because of its execution and delivery. An increasing number of consumers and companies worldwide are coming online, which will surely increase the amount of eyes on the company’s ads and in turn, advertising revenue. At this rate, look for Google to remain on top of the Internet world.

While the new version of Google’s Android operating system has been referred to as “Key Lime Pie” both internally and in the media for months, on Tuesday, Google, in partnership with both Nestle and Hershey (NYSE:HSY), announced that the new version of Android will be called “KitKat.”

T = Technicals on the Stock Chart Are Mixed

Google stock has been moving higher over the last several years. The stock is currently pulling back from highs for the year so it may need a bit of time to recover. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Google is trading between its key averages, which signal neutral price action in the near-term.

GOOG

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Google options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Google Options

23.98%

83%

80%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Steep

Average

October Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Google’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Google look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-5.53%

13.60%

17.06%

-21.61%

Revenue Growth (Y-O-Y)

15.52%

31.23%

24.87%

45.07%

Earnings Reaction

-1.55%

4.43%

5.49%

-1.90%

Google has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have expected a little more from Google’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Google stock done relative to its peers Yahoo! (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), Baidu (NASDAQ:BIDU), and sector?

Google

Yahoo!

Microsoft

Baidu

Sector

Year-to-Date Return

22.65%

40.55%

16.74%

34.50%

27.98%

Google has been an average relative performer, year-to-date.

Conclusion

Google is an Internet giant that provides valuable search and advertising services to a growing user base worldwide. In an unexpected change, the company has chosen to rename its future Android operating system as KitKat. The stock has been moving higher in recent years and is now pulling back from highs for the year. Over the last four quarters, earnings have been mixed while revenues have been rising. However, investors in the company have expected more from the company. Relative to its peers and sector, Google has been a year-to-date performance leader. WAIT AND SEE what Google does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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